In order to combat cross-border tax avoidance and tax evasion, the European Commission (the EC) has been asked to present a directive proposal for the mandatory reporting of information about potentially aggressive tax-planning arrangements, this in accordance with action item 12 of the OECD’s Base Erosion and Profit Shifting project (BEPS).

‘Don’t forget to send the tax inspector a copy of all the advice you give!’

On 25 June 2018, the mandatory disclosure directive (EU 2018/822) (DAC6) came into force. This directive means that intermediaries and taxpayers are obliged to report potentially aggressive tax-planning arrangements and CRS (Common Reporting Standard) avoidance. Directive (EU) 2018/822 further expands the scope of Directive 2011/16/EU in respect of the mandatory automatic exchange of information between EU member states to include data and information about reportable cross-border arrangements.

Aim: the exchange of information and the deterrent effect

The aim of the directive is the collection of information that relates to potentially aggressive cross-border tax-planning arrangements. It is not intended that all tax-related advice or arrangements should come under this directive’s scope. Instead, the directive focusses on arrangements that may indicate the existence of tax avoidance. The exchange of information means that at an early stage, the EU member states’ tax authorities will be able to carry out tax audits that are more effective, this in turn improving the quality of the risk assessments. In addition to the exchange of information, the aim is to have a deterrent effect for intermediaries to be deterred from becoming involved in such arrangements.

Which types of taxation does this directive relate to?

In practice, mandatory disclosure applies to every type of taxation that is levied by a member state or by the territorial or administrative constituent parts of a member state, including local authorities. Taxes such as turnover tax, customs duties and excise duties for which other EU legislation to bring about administrative cooperation is already in place are explicitly excepted from the scope of this new directive, as are social insurance contributions.

Who has to disclose?

In principle, mandatory disclosure is imposed on the persons known as the Intermediaries. Intermediary means: any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement1. In addition, mandatory disclosure applies to those persons who provide assistance or advice2. Therefore, mandatory disclosure applies to any intermediary who is involved in a reportable arrangement.

In order to be an intermediary, a person shall meet at least one of the following conditions:

be resident for tax purposes in a EU Member State;

have a permanent establishment in a EU Member State through which the services with respect to the arrangement are provided;

be incorporated in, or governed by the laws of, a EU Member State; and

be registered with a professional association related to legal, taxation or consultancy services in a EU Member State3.

In order to prevent duplicate reporting, an intermediary does not need to disclose if he can make a plausible case that the disclosure has already been undertaken by another intermediary, including by one in another EU member state.

No intermediary? Then it is the ‘relevant taxpayer’ who discloses

If no intermediary is involved in a reportable cross-border arrangement (note that this also applies if the intermediary has his registered office outside the EU) or if an intermediary invokes the statutory right of non-disclosure then the responsibility for mandatory disclosure may be shifted to the relevant taxpayer. ‘Relevant taxpayer’ means any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement4.

What has to be disclosed?

The term ‘reportable cross-border arrangement’ consists of the following elements: ‘arrangement’, ‘cross-border’ and ‘reportable’ (subject to mandatory disclosure). There is only said to be a cross-border arrangement if the arrangement either relates to more than one EU member state or to a EU member state and a third country5.

The terms ‘reportable cross-border arrangement’ and ‘arrangement’ have not been defined. This is a conscious decision, because the aggressive tax-planning arrangements are becoming ever more complex as tax consultants (and others) try to anticipate countermeasures by the tax authorities. Instead of an unambiguous definition, efficiency considerations have led to the drawing up of a list of characteristics, features and elements of those transactions that could indicate tax avoidance or tax abuse6. These transactions are called “essential hallmarks”.

Essential hallmarks

The aforementioned essential hallmarks are set out in Annex IV, which has been added to Directive 2011/16/EU. A conscious decision has been made to use an annex because it means that the individual essential hallmarks can be modified over time. There is said to be a reportable cross-border arrangement if the arrangement possesses at least one of the following essential hallmarks:

‘Main benefit’ test

All the essential hallmarks listed under (a) and (b) above also have to satisfy the ‘main benefit’ test6. Certain essential hallmarks listed in section (c)7 have to satisfy this test too. The main benefit test will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.

The reportable cross-border arrangement has to be reported to the tax authorities. This report could for instance include a summary of the main features of the arrangement and the identification details of those taxpayers who could be affected by the arrangement.

When to disclose? Please note: retroactive application back to 25 June 2018

According to the text of the directive, mandatory disclosure does not come into force until 1 July 2020. However, in order to prevent an even more diverse range of reportable cross-border arrangements from being set up before this date, the mandatory disclosure directive has retroactive effect back to 25 June 2018. This means that all reportable cross-border arrangements whose first step was implemented on or after 25 June 2018 have to be reported too. This initial reporting must be made by 31 August 2020 at the latest. In other words, it is very important to already start checking now whether there are any cross-border arrangements that need to be reported.

Arrangements then need to be reported no later than 30 days from the day following the day on which the reportable arrangement was made available for implementation or is ready for implementation or as soon as the first step towards implementation is taken or the day after the intermediary has directly provided help, assistance or advice via other persons.

You’ve disclosed the arrangement – now what?

The information obtained will be reciprocally exchanged between the member states by means of the EU’s existing CCN network8. The information that is provided to this network may be viewed by the authorities of all member states.

Failure to disclose? Then expect highest category penalty

If disclosure is not made in time or at all or else is made incompletely or incorrectly then this will be deemed to be a criminal offence, for which a maximum fine of EUR€ 830,000 may be imposed (under Dutch law).

Implementation in the Netherlands

In the Netherlands, an Internet consultation process was launched on 19 December 2018 regarding the implementation of the mandatory disclosure directive.